Terence Corcoran: Fiscal fight left for another day

Flaherty takes advantage of low interest rates to keep spending, while warning Canadians not to do the same

This is no budget for fiscal conservatives and small-government libertarians, but Jim Flaherty’s flabby big “L” liberal puffball of a 2012 fiscal plan is guaranteed to knock the platforms out from under the opposition parties.

That’s a good thing, at least for the short term. Certainly Bob Rae and Thomas Mulcair have nothing to stand on today in the wake of Mr. Flaherty’s fiscal card tricks. But time may be on their side. When the next election rolls around the Tory financial picture could begin to look a little creaky and unsustainable.

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For all its superficial achievement of budgetary balance by 2015, the Harper Tories remain on a risky fiscal track. Mr. Flaherty, in fact, is doing exactly what he has been warning Canadians about on mortgages. As he said in one of his finger-wagging sessions with Canadian home buyers last January, “We want to make sure we don’t have the kind of medium-term problem that has been experienced elsewhere … to assume large indebtedness at low interest rates,” Mr. Flaherty said.

Good bit of advice, but not one the government is taking. Running up debt and claiming victory over deficits on the basis of low interest rates is exactly what Mr. Flaherty’s new budget does.

By my count, the big-spending Flaherty budget holds on to its balanced-budget targets only because it has been able to cash in on more than $27-billion in interest rate charges on $600-billion in national debt — interest Ottawa now forecasts will not have to be paid this year and over the next few years.

In other words, Ottawa is being bailed out by windfall rock-bottom interest rate policies maintained by the Bank of Canada and the U.S federal reserve, rate policies that will not be around forever. But instead of using the low-rate environment to help balance the budget sooner, the Harper government just keeps on spending.

One budget list of new spending items totals $2-billion over two years, including $760-million in subsidies for job creation and innovation. More backing ($100-million) for the government-owned Business Development Bank and $400-million to promote the creation of “large scale venture capital” and $67-million this year alone to transform the National Research Council into a product commercialization outfit.

The mass of government subsidies to business remain in place, some new ones added and some expanded. Is there a sector of corporate Canada — from financial services to the forest industry and small business — that does not receive Meals on Wheels visits from Ottawa? Take, for example, the forest industry. After getting more than $1-billion in the last couple of years, the forest sector will receive another $105-million to “promote innovation and market development.”

The major recommendations of Canada’s subsidy-seeking R&D spenders appear to have been adopted.

The stench of industrial strategism, with governments throwing their regulator power, resources and money to back key economic sectors, appears to be in full swing. Mr. Flaherty, in his speech, rattled off the national/provincial push for resource development. “The potential exists in every region of the country — natural gas in British Columbia, oil and minerals in the Prairies, the Ring of Fire in Ontario, Plan Nord in Quebec, hydro power in Atlantic Canada, and mining in Canada’s North.”

There are no tough spending cuts — total program spending, in fact, remains exactly where it was expected to be for this coming year at about $245-billion, as forecast in 2010. It’s now forecast to rise by more than 4% in years to come, sailing along on a tidal wave of new spending initiatives and corporate handouts.

But here’s the interest rate gamble. Spending continues but tax revenues are weaker. Tax revenues for the coming year are expected to be $255-billion this year, about $11-billion below 2010 forecasts.

So we have revenue down $11-billion but still the budget will more or less hit its deficit targets for this year and next — an achievment that comes almost exclusively from low interest rates. Original 2010 estimates for debt charges for this year: $39-billion. Current debt charge estimate: $30.8-billion. Saving: $9-billion. Result: Deficit target hit, more or less.

That’s the real story of Ottawa’s fiscal situation, the rest being a catalogue of new spending and initiatives that demonstrate to Canadians that the Harper Tories are no more fiscally conservative than any other government in Canadian history. As Canadians have learned, it takes a crisis to bring in fiscal restraint. Liberal Finance Minister Paul Martin curbed spending in the 1990s only after the Canadian dollar hit a wall. We are a long way from that today, but we are laying the track for a future confrontation with the inevitable higher interest rates.

It’s a track that will likely keep the Harper Tories in good standing with most Canadians, leaving the opposition parties scrambling for footing. For fiscal and the smaller-government conservatives, the Flaherty budget leaves little hope.

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